Inside the burgeoning world of cannabis insurance

There has recently been an uptick in searches for insurance to cover the cannabis supply chain and business, signalling a fresh demand for this type of cover.

This is according to digital risk appetite directory Insurercore which noticed a rise in searches on its platform, with founder and managing director Peter Clarke labelling the need for insurance for the cannabis supply chain as an “emerging risk”.

The Covid-19 outbreak has increased US cannabis demand, according to specialist insurance intermediary New Dawn Risk.

But the pandemic has also further exacerbated the financial pressures legal cannabis organisations across the pond may be experiencing, for example struggling to obtain insurance due to the legal uncertainty that encompasses this market.

This could lead the US to turn to the UK insurance market for help.

Meanwhile, the legalisation of cannabis has long been debated, but on 1 November 2018 UK law changed, allowing the drug to be used for medicinal purposes if it is prescribed by a specialist consultant.

Insurance Times examines the world of cannabis insurance and how this line might be a key opportunity for brokers as every part of the supply chain needs to be covered, from general liability to property and workers’ compensation.

Looming cover gap

Despite the cannabis market growing at pace, there is still a $1bn insurance gap looming according to Max Carter, chief executive of New Dawn Risk.

He stressed that many firms have “significant insurance needs that are critical to help them manage risks that exist in this young industry, with its untried and societal framework”.

Carter said the growth in this sector is “inexorable”, citing that 32 US states have legalised cannabis for medical or recreational use.

Speaking about the US market in New Dawn Risk’s white paper, Understanding and Opening Up the US Cannabis Insurance Market, he said: “The pandemic will make it even tougher for cannabis producers to obtain insurance as providers further tighten terms and conditions and introduce exclusions, while insurers who may have been looking to enter the market will put their plans on hold.”

Although US insurers in this market are scarce, it does not mean there is no insurance for the cannabis industry.

For example, in August 2018 Lloyd’s of London allowed its member firms to underwrite cannabis-related business in Canada, if international laws were met.

But Lloyd’s does not permit this where the plant is illegal – therefore working with US clients is forbidden.

Last year in December, Aon and Berkshire Hathaway Speciality began providing cannabis insurance to American companies in the legal marijuana industry.

Complex underwriting

Underwriting cannabis insurance is complicated as it is “more rigorous and technically focused”, cited Aon’s Global Market Insights Report Q1 2020.

Aaron Sussman, Clyde and Co’s senior associate, told Insurance Times that one of the difficulties of underwriting the risks for this line of cover is the lack of data to provide to underwriters, as it is a young market.

Sussman continued: “It’s part of the reason why insurance for cannabis businesses has been so expensive. For the first few years, at least, it is expected that the premiums will be higher.”

Directors’ and officers’ insurance premiums for the bigger firms have also “skyrocketed”, added Sussman, as many larger cannabis companies have been sued under shareholder lawsuits because the market is still in its infancy.

“Insurers are starting to feel burned and are therefore pricing their products cautiously,” he said.

Legal minefield

Sussman continued: “Under federal law there is no medicinal benefit to marijuana; its highly addictive and the dangers are high.

“As a result, insurers and banks are very weary of entering this legal minefield. There is a great deal of concern from the larger insurers - they do not want to touch this.”

Sussman added that there has been no successful attempt to change the Controlled Substances Act in the US.

“We have seen a number of examples where insurance would be helpful to cannabis businesses,” he said, giving the wildfires as an example of risk.

On a local level, some states such as Oregon have decriminalised the drug; in 2012, Colorado and Washington legalised recreational use.

The fact that it is illegal could potentially lead to money laundering charges as banks or insurers would have engaged in business that is illegal under federal law.

Further complications can arise from the fact that cannabis is often paid for via cryptocurrency or bitcoin, as most of the large banks refuse to take cash payments for it.

However, there is some confusion about the legality of cannabis compounds, such as tetrahydrocannabinol (THC), being used in beauty products, sweets, and cannabidiol (CBD) oils.

Sussman warned that if there continues to be a lack of cover for this market it will “inhibit its growth”.

He predicts that if cannabis becomes legal in the UK, Lloyd’s will change its current requirements and insurers will begin offering these products to the US.